When you take any loan—personal loan, home loan, car loan, education loan, or business loan—you must repay it in small monthly amounts. These monthly payments are called EMIs.
Most people pay EMIs every month, but very few actually understand how loan EMI is calculated. Because of this, many borrowers:
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Choose the wrong loan tenure
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End up paying more interest
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Feel confused when EMI changes
So let’s answer the most common questions:
👉 What is EMI?
👉 How is loan EMI calculated step by step?
👉 Why does EMI change when interest rate or tenure changes?
👉 How can you reduce EMI and total interest?
This guide explains everything clearly, slowly, and simply.
What Is Loan EMI? (In Simple Words)
EMI stands for Equated Monthly Installment.
It is the fixed amount you pay every month to the bank or lender until your loan is fully repaid.
An EMI includes:
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Principal amount (the money you borrowed)
-
Interest amount (the cost of borrowing)
Why Is EMI Important for Borrowers?
Your EMI decides:
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Your monthly budget
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Your savings ability
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Your financial stress level
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Total interest paid on the loan
If EMI is too high, it can disturb your daily expenses.
If EMI is too low, you may pay more interest over time.
That’s why EMI calculation is very important.
What Factors Decide Your Loan EMI?
Loan EMI is calculated based on three main factors:
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Loan Amount (Principal)
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Interest Rate
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Loan Tenure
Let’s understand each factor clearly.
What Is Loan Principal Amount?
The principal amount is the actual money you borrow from the lender.
Example:
If you take a loan of ₹5,00,000, then:
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Principal = ₹5,00,000
Higher principal = higher EMI.
What Is Loan Interest Rate?
The interest rate is the percentage charged by the lender on the principal.
It is usually shown as:
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Annual interest rate (per year)
Example:
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10% per year
-
12% per year
Higher interest rate = higher EMI and higher total interest.
What Is Loan Tenure?
Loan tenure is the time period for which you take the loan.
It can be:
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12 months
-
24 months
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60 months
-
20 years (for home loans)
Longer tenure = lower EMI but more interest
Shorter tenure = higher EMI but less interest
The EMI Calculation Formula (Simple View)
Loan EMI is calculated using this formula:
EMI = [P × R × (1 + R)^N] / [(1 + R)^N – 1]
Where:
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P = Loan amount (principal)
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R = Monthly interest rate
-
N = Loan tenure in months
Don’t worry if this looks complex.
Let’s break it down step by step.
Step 1: Convert Annual Interest Rate to Monthly Rate
Banks show interest rates per year, but EMI is calculated per month.
So we divide the annual rate by 12.
Example:
If annual interest rate = 12%
Monthly interest rate = 12 ÷ 12 = 1% per month
Step 2: Convert Loan Tenure into Months
Loan tenure is often given in years, but EMI calculation uses months.
Example:
5 years loan = 5 × 12 = 60 months
Step 3: Put Values into the EMI Formula
Let’s take a simple example.
Example Loan Details:
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Loan amount = ₹5,00,000
-
Interest rate = 12% per year
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Tenure = 5 years (60 months)
Now:
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P = 5,00,000
-
R = 1% (0.01)
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N = 60
Using the EMI formula, the EMI comes to around ₹11,122.
What Does Your EMI Actually Include?
Every EMI has two parts:
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Interest portion
-
Principal portion
In the early months:
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Interest portion is higher
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Principal repayment is lower
In the later months:
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Interest portion reduces
-
Principal repayment increases
What Is an Amortization Schedule?
An amortization schedule shows:
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Monthly EMI breakup
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How much goes to interest
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How much goes to principal
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Remaining loan balance
It helps borrowers understand how the loan reduces over time.
Why Is Interest Higher in Early EMIs?
Because interest is calculated on:
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Outstanding loan balance
At the start:
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Outstanding balance is high
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Interest amount is high
As principal reduces:
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Interest amount also reduces
How Loan Tenure Affects EMI
Short Tenure Loan:
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Higher EMI
-
Lower total interest
-
Faster loan closure
Long Tenure Loan:
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Lower EMI
-
Higher total interest
-
Longer repayment stress
Choosing the right tenure is very important.
How Interest Rate Changes EMI
Even a small interest rate change can affect EMI.
Example:
On a ₹10 lakh loan:
-
8% interest → lower EMI
-
10% interest → higher EMI
Over long tenure, this difference becomes very large.
Fixed EMI vs Variable EMI
Fixed EMI Loans:
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EMI remains same
-
Easier budgeting
-
Mostly personal loans
Variable EMI Loans:
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EMI may change
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Linked to market rates
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Common in home loans
How EMI Is Calculated for Different Loan Types
Personal Loan EMI
-
Fixed interest rate
-
Fixed EMI
-
Short tenure
Home Loan EMI
-
Variable interest rate
-
EMI may change
-
Long tenure
Car Loan EMI
-
Medium tenure
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Fixed or variable rate
How Prepayment Affects Loan EMI
Prepayment means paying extra money before schedule.
Prepayment helps:
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Reduce principal faster
-
Lower interest amount
-
Shorten loan tenure
Some banks reduce EMI, others reduce tenure.
How EMI Changes with Part Payment
If you pay extra ₹50,000 on a loan:
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Outstanding balance reduces
-
Future interest reduces
-
EMI or tenure changes
Always ask bank how they adjust prepayment.
How to Reduce Loan EMI Legally
You can reduce EMI by:
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Choosing longer tenure
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Negotiating lower interest rate
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Improving credit score
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Making prepayments
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Refinancing loan
Smart planning saves money.
How Credit Score Affects EMI
Higher credit score:
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Lower interest rate
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Lower EMI
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Better loan terms
Low credit score:
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Higher interest
-
Higher EMI
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More rejection risk
Why EMI Calculators Are Helpful
Online EMI calculators:
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Show EMI instantly
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Help compare loans
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Save time
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Avoid calculation mistakes
They don’t affect your credit score.
Common EMI Calculation Mistakes Borrowers Make
❌ Ignoring total interest paid
❌ Choosing lowest EMI blindly
❌ Not checking interest type
❌ Forgetting processing fees
Always look at the full picture.
EMI vs Total Loan Cost: What Matters More?
Low EMI may look attractive, but:
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Total interest may be high
Always check:
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Total amount payable
-
Interest paid over tenure
How EMI Affects Monthly Budget
Ideal EMI:
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Should not exceed 40–50% of monthly income
Higher EMI can:
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Increase stress
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Reduce savings
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Cause missed payments
Should You Choose Low EMI or Short Tenure?
Choose based on:
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Income stability
-
Financial goals
-
Future plans
Balanced EMI is always best.
EMI Calculation for Self-Employed People
Banks check:
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Income stability
-
Business cash flow
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Existing liabilities
EMI calculation is same, but eligibility differs.
Loan EMI Myths You Should Avoid
❌ EMI is same for everyone
❌ Longer tenure is always better
❌ EMI includes only interest
❌ EMI never changes
Knowing facts helps avoid mistakes.
Final Thoughts: Understand EMI Before Taking Any Loan
Loan EMI is not complicated if you understand:
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Principal
-
Interest
-
Tenure
A borrower who understands EMI:
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Saves money
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Avoids stress
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Makes better financial decisions
Always calculate EMI before signing any loan agreement.
Frequently Asked Questions (FAQs)
Q1. What is EMI in simple words?
EMI is the monthly amount you pay to repay a loan.
Q2. Does EMI include interest?
Yes, EMI includes both interest and principal.
Q3. Can EMI change during loan tenure?
Yes, for variable interest rate loans.
Q4. Is lower EMI always better?
Not always. Lower EMI may mean higher total interest.
Q5. Can EMI be reduced later?
Yes, through prepayment or refinancing.
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